According to the U.S. Department of Health and Human Services, almost 70 percent of all adults over age 65 will need long-term care at some point. Long-term care refers to anything from assistance with basic living tasks and personal care, to skilled nursing care in a residential facility. Because it’s almost impossible to know what type of care one may need and when, it’s important to consider all of the options well before they are required.
Too many families, though, fail to consider the costs of long-term care when planning for retirement. They assume that they won’t need care, that insurance will cover their needs, or, most commonly, that Medicare and Medicaid will take care of their needs. What they don’t realize, though, is that Medicare only covers medically necessary nursing home costs, and home health care (not personal care) only in certain situations. Medicaid will pay for a wider range of services — and actually does pay for nursing home care for about 50 percent of all patients — but the qualifying criteria are stringent.
Medicaid and Long-Term Care: An Overview
Medicaid is a health coverage program for low-income individuals with limited resources. Individual states operate their own Medicaid programs under the federal umbrella, and eligibility requirements vary from state to state, but low-income seniors are generally eligible for assistance.
Because Medicaid will cover the costs of nursing care, some individuals develop a financial plan that will render them eligible for Medicaid when the time comes that they need long-term care. In the past, older adults would transfer assets, usually to their children, in order to qualify for Medicaid. Because this put such a strain on resources, though, Congress passed a law to prevent individuals from effectively “hiding” assets in order to qualify for Medicaid.
Known as the “five year look back,” this means that individuals applying for Medicaid may have to show the previous five years of income and assets, and if any assets were divested in that period for less than their market value — including those transferred via an irrevocable trust — they could still be counted toward your assets.
For example, say that you have over $125,000 in a retirement account, and put it into an irrevocable trust with your children as trustees. If you need to go into a nursing home five years and three months later, you may qualify for Medicaid, depending on your other assets, and the assets in the trust will not be considered. If you have to go into a nursing home in four years and six months, though, you may be ineligible for Medicaid, depending on your state’s rules.
How long you’re ineligible usually depends on the average cost of nursing care in your area. The government will divide the value of the assets by the average cost of care to determine how long you’re ineligible. If the average cost is $4,000, and you transferred $125,000, then you’ll be ineligible for about 31 months, or two and a half years. In addition, depending on how you transferred your assets, you may be unable to access them to pay for your care; i.e., an irrevocable trust requires you to relinquish assets permanently.
Keep in mind that each state assesses assets differently. Most states, for example, do not consider your home or your primary vehicle as assets, and will not count them toward your Medicaid eligibility. Retirement plans, savings accounts, and other sources of income do count, though.
Is a Trust the Answer?
Establishing an irrevocable living trust, in which you give control of your assets to a trustee, is often viewed as a solution to the long-term care/Medicaid conundrum. By moving your assets into such a trust, you sever your ownership of them and therefore prevent them from being used to cover the costs of your nursing care. In addition, you can earn some income from your trust, and it prevents your estate from the lengthy and potentially costly probate process after your death.
However, if you are going to establish a living trust as part of your long-term care planning, it must be an irrevocable trust. A revocable trust, in which you can regain control of your assets at any time, is useless in terms of qualifying for Medicaid because the state will still consider you the owner of the assets.
In either case, it’s best to consult with your attorney and financial planner before making a decision in regards to your long-term care, as there are potential tax consequences as well. That being said, given the likelihood that you will need some sort of care, coming up with a plan to pay for it is an important task — and it’s better to do it sooner rather than later.